How to Split an IRA in a Divorce Proceeding

Everybody ponders the question: Keep me signed in Submit. Before deciding which formula to use, a court may first want to determine why the options were granted to the employee e. You will be contacted to set up an in-person consultation. Enter Email Confirm Email. The only surefire way to find out the market value of your house is to sell it.

The easiest and most common method to divide stock options is to have the employee spouse who owns the option offset the agreed upon value of the option with another asset. For instance, if the option is valued at $,, the non-employee spouse is entitled to $50,

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Determining the true value of a retirement plan: The date of separation is critically important when valuing a retirement plan. As is the case with the income of either spouse, any increase in the value of the plan after the date of separation is the separate property of the beneficiary spouse.

Contrast this with the way in which assets are valued - at the date of trial. This may lead to confusion, even among financial professionals. John and Sue Smith decide to divorce in John moves out of the house and rents an apartment. Neither holds out any hope of reconciliation. However, John and Sue aren't in any great hurry to get divorced, and they don't complete the process until All of the appreciation in John's retirement between and is considered his separate property.

Sue is therefore only entitled to half of the value of his retirement plan as valued from the date of their marriage to the date of separation.

Calculating the true value of a retirement plan is an important part of the asset division process. It can seem daunting at first, and some people choose to have a third party such as an accountant value a retirement plan. Unfortunately for many married couples, dividing debt is just as important as dividing assets.

If you choose to mediate your divorce, you may divide your debt in the manner that works best for you both. If your divorce goes to trial, you won't have this luxury. The following information explores how a court might order the division of debt pursuant to a litigated divorce -- information that may help you negotiate an agreement with your spouse.

First, remember that any debt incurred during marriage and prior to separation is community property, regardless of who incurred it. This means that if your spouse secretly racked up massive credit card debt while you were married, you are out of luck. However, this is a glimmer of hope, and that involves the nature of the debt. If the debt was incurred to benefit the "community," i. However, if the debt was incurred solely for the benefit of one spouse, relief may be available. John and Sue Smith lived modestly.

They made timely payments on their mortgage, took one inexpensive family vacation per year, and rarely ate at nice restaurants. John completely managed the family finances, from balancing the checkbook to paying credit card bills. Unbeknownst to Sue, while they were living in the same house and separation wasn't yet being discussed , John was incurring huge credit card bills on hotel rooms and lavish meals in an attempt to impress his young lover.

Sue is greatly relieved to learn that the debt associated with John's seduction of his lover is his separate property. Note, however, that Sue's relief may be short lived. While a court can certainly divide debt and order that one spouse is solely responsible for a particular debt, credit card companies are not hindered by these orders if the credit card was a joint card.

Creditors may still collect from either spouse. The only remedy for the aggrieved spouse is to go after the spouse who incurred the debt for reimbursement.

Use of community property to pay pre-marital debt: Sometimes one spouse enters a marriage with debt. If community property funds are used to pay down that separate property debt, the community is entitled to a reimbursement for the amount it paid. Sue Smith had large credit card debts she incurred prior to marrying John. To improve their credit rating so they could buy a house, Sue and John worked hard to pay off the debt. Now that they are debt free, Sue files for divorce.

Because Sue and John used community property earnings to pay off Sue's separate property debt, the community is entitled to reimbursement for the amount paid. In other words, John should ultimately recover half of the amount used to pay off Sue's debt, as half of all community property is his. Use of separate property to pay community property debt: In California, if one spouse's separate property is used to pay off a community property debt, a court will presume that a gift was made to the community.

However, there is an important exception to this rule. When one spouse uses his or her separate property to acquire community property, he or she has a statutory "tracing right" of reimbursement. Such contributions include payments of principle i. Note that this does not include payments for maintenance of the property, interest on the underlying loan, or taxation.

Consider the following examples:. Sue and John Smith decide to send their child, Bobby, to private school. John uses funds from his separate property brokerage account to pay the tuition. He is not entitled to reimbursement from the community for this payment. Sue and John Smith want to purchase a home. John has significant savings that he accumulated prior to marriage. He uses these savings to make the down payment on their new home.

John is entitled to "trace" this contribution to his separate property, meaning he has the right to reimbursement from the community for the amount of the down payment. Sue and John Smith decide their home is too small, and John uses savings that he accumulated prior to marriage to "improve" the property by adding an extra room. John is entitled to trace this contribution to his separate property, and he is entitled to reimbursement from the community.

Sue and John Smith are struggling to pay all of the expenses associated with living in their home. As a result, John agrees to pay for the maintenance of the home and all associated property taxes using his separate property savings.

Unfortunately for John, he is not entitled to reimbursement from the community for any of this amount. Had John used his separate property to make principal payments on the mortgage, he could trace his contribution and qualify for reimbursement. However, because John used his funds to pay taxes and maintenance costs associated with the home, he is out of luck. Use of separate property to pay community property debt after separation: Once a couple has separated, a spouse who uses separate property to pay pre-existing community debt is entitled to reimbursement from the community.

This reverses the presumption of a gift that exists when separate property is used to pay a community debt before separation. Note, however, that there are a few exceptions to this rule. The first is that the paying spouse is not entitled to reimbursement when the amount paid is not substantially in excess of the value of the use.

This may sound like a mouthful, but all it means is that a spouse who enjoys the use of the property should not be reimbursed for paying down debt associated with that property, so long as the value of the use is roughly equal to the amount paid.

John and Sue Smith separate, and John continues to make loan payments on his pickup truck. Sue never drives the truck. In other words, John is the only one who enjoys the benefit of the truck. As a result, the payments John makes on his pickup truck can be correlated to his use of the truck. He is therefore not entitled to reimbursement from the community for the loan payments, even if the truck is held jointly.

There are two additional exceptions to the rule that a spouse is entitled to reimbursement for amounts paid to pay off a community debt after separation: Use of community property funds to pay separate living expenses after separation: The community is only entitled to reimbursement when one spouse uses community property funds to pay his or her separate living expenses to the extent that those expenses exceed a "reasonable" amount of child support and spousal support.

Of course, as is the case in so many areas of the law, understanding the meaning of the term "reasonable" is important. While the term will vary from case to case, a reasonable amount would probably be the amount of guideline support that a court would order in an application for temporary child and spousal support.

After separating from John Smith, Sue remains in the family home and continues to care for their son, Bobby. As a result, a judge might order that Sue reimburse the community for the difference between guideline support and the amount of community property she liquidated i.

One spouse remains in primary residence while other spouse makes mortgage payments: Quite often one spouse moves out of the family home during separation while the other spouse remains in the home. The spouse who leaves may offer to keep paying the mortgage and property taxes. Unless these payments are in made in accordance with an agreement to waive reimbursement or the payments are a form of child or spousal support, the paying spouse may be entitled to reimbursement because he or she is paying a community debt with separate property funds.

Lastly, the spouse who stays in the home could be in trouble in a contested divorce if the fair market rental value of the home exceeds the mortgage payments. If a home was recently purchased, the mortgage payments will almost always exceed the fair market rental value of a home.

However, this often isn't true with older properties. A home bought twenty years ago may be encumbered by a fairly modest mortgage. However, in the intervening twenty years, the fair market rental value of the home may have increased dramatically. The spouse remaining in the home after separation may therefore be required to reimburse the community for the difference between the mortgage payments and the fair market rental value of the home between the date of separation and the date of trial.

John and Sue Smith decide to separate, and they both agree that Sue should stay in the home with their son, Bobby. John continues to pay the mortgage using his income from his job. The Smiths separate 10 months before their divorce is final. And it doesn't stop there. If you are the spouse remaining in the home during separation, make absolutely sure that you document in writing that the privilege of remaining in the house should be considered an element of spousal support or child support, if applicable and that the paying spouse should not receive any reimbursement as a result.

Legal Notices and Conditions Use Contact. Dividing Property Basic legal principles Various investments Closely held businesses Stock options Retirement plans Debt California is a community property state, and as a result, the basic principle that governs the division of assets upon divorce seems simple enough.

Basic Legal Principles Before property can be divided and distributed, it must be characterized as "separate property," "community property," or "quasi-community property. The following are examples of compensation: Stock in lieu of salary Employer contributions to an employee profit-sharing plan Incentive stock options A"gift" from an employer of real estate, for instance , which is in reality deferred compensation in lieu of a pension Vacation pay, or the right to receive certain other financial benefits as deferred compensation upon termination of employment All earnings from a privately held business are considered community property to the extent they reflect either spouse's participation in the business.

Consider the following example: Additional Important Concepts Date of separation: Asset Division, Practically Speaking The intense stress of divorce often causes couples to ignore the many costs associated with dividing or selling assets. Dividing the Investment Portfolio If you have a financial advisor, consulting with him or her will be an important part of the divorce process.

The following will get you started: If the court determines that the options were granted to the employee spouse 1 as a reward for past service, or 2 as an up-front incentive to attract the employee to the job, the following formula may apply: Applying the formula set forth above, then, we have: Contrast the above formula with the approach that is used when options are granted as an incentive to keep an employee with a company: Applying the formula set forth above, we have: Retirement Benefits Like virtually everything else, a retirement account is considered community property to the extent the retirement benefit was earned during the course of marriage.

Here's an example using simplified data: If you have questions about the division of stock options you should contact an experienced family law attorney for advice. We've got a wealth of information in our section on California Property Division in Divorce. Marriage of Hug Cal.

Marriage of Nelson Cal. The information provided on this site is not legal advice, does not constitute a lawyer referral service, and no attorney-client or confidential relationship is or will be formed by use of the site. The attorney listings on this site are paid attorney advertising.

In some states, the information on this website may be considered a lawyer referral service. Please reference the Terms of Use and the Supplemental Terms for specific information related to your state. Alimony Divorce and Property. This article covers ways California couples can divide stock options in divorce.

Separate Property Separate property is not part of the martial estate, which means the spouse that owns the separate property, owns it separately from their spouse not jointly and gets to keep it after the divorce.

In California, separate property includes all property that is acquired by either spouse: Dividing the Options So how does the court determine what portion of the options belong to the non-employee spouse?

The Hug formula The Hug formula is used in cases where the options were primarily intended to attract the employee to the job and reward past services. The formula used in Hug is: The formula used in Nelson is: Distributing the options or their value After application of either time rule, the couple will know how many options each are entitled to.

Here are a few of the most common solutions: When a non-statutory stock option is exercised, the profits are taxed as ordinary income, which is often at much higher rates. If a statutory stock option is transferred from one spouse to the other in a divorce note: When the transferee or receiving spouse exercises the option, the gains are taxed as ordinary income which is taxed at a much higher rate than current capital gains taxes. The managing spouse, or trustee, technically still owns the option which maintains their statutory qualification.

Thus, if the stock option trustee breaches their fiduciary duty to the beneficiary a cause of action will lie for that breach. This is the only redeeming factor associated with the stock option trust. Under the stock option trust, when the stocks are sold the profits from the sale are taxed as capital gains as opposed to regular income.

The profits are then distributed by the trustee to the beneficiary — the nonemployee spouse.

A Common Stock Option Hypothetical

Mar 19,  · Valuations of even the most common assets can become points of contention. In financially complex divorces, couples often have assets that are more difficult to divide, or potentially easy to overlook. Of these, stock options and restricted stock are some of the most complicated and difficult assets to divide fairly. Nov 28,  · Unlike the IRA or the Porsche--assets that are easy to identify, value and transfer upon divorce--unexercised stock options granted during a marriage, or even immediately after a marriage . Employee Stock Options and Divorce. As the stock market continues to rise, divorce attorneys are involved in more and more cases involving stock options. The grant of stock options to key employees is now common in high technology companies and is becoming popular in many other industries as part of an overall equity compensation strategy.